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Australian households becoming better at saving

MARK COLVIN: Retailers aren't happy about it, but Australians have got a lot better since the global financial crisis at saving money and paying off debt.

Now new research suggests that, in doing so, the nation's households have built an important buffer against economic shocks, including sudden job losses.

And with the unemployment rate expected to keep rising this year, the study shows most households are in a good position to continue paying off their debts.

Finance reporter Rebecca Hyam has the details.

REBECCA HYAM: As a country, we have a long-standing love affair with debt.

And by international standards, Australia's household debt levels are high.

When the Reserve Bank started keeping records in 1977, Australian households, on average, had debt equal to about one-third of an annual after-tax income.

Today that debt to income ratio stands at almost 150 per cent.

But a senior economist at the Commonwealth Bank, Michael Workman says even at that level, there's no need to panic.

MICHAEL WORKMAN: I wouldn't use the word "worrying". I'd most probably use the words "relatively high" but there are quite understandable reasons why Australian households tend to carry relatively high debts. Generally because the cost of housing is relatively high in Australia compared to many other OECD economies.

REBECCA HYAM: The Commonwealth Bank has examined research from the Australian Bureau of Statistics, the Reserve Bank and the Melbourne Institute's Household Income and Labour Dynamics in Australia, or HILDA report.

Not surprising, it's found that mortgages account for the largest source of the nation's household debt.

But the research also shows the majority of housing-related debt is held by people with higher education levels, who have access to well-paying jobs and are therefore better equipped to service that debt.

MICHAEL WORKMAN: The higher income jobs generally tend to have these characteristics around being more stable in terms of employment opportunities. So you tend to get in Australia this structural kind of outcome where people with the more stable, higher income jobs tend to carry a proportionally much larger amount of housing related debt.

REBECCA HYAM: Michael Workman says there's been a great deal of commentary conveying the impression that household debt levels are too high, leaving many people with unmanageable commitments.

He says that's wrong and that the period following the global financial crisis was a stress test, which proved Australia's ability to cope well with adverse economic developments.

MICHAEL WORKMAN: We went through a period quite recently, where the unemployment rate after the GFC peaked at just under 6 per cent and what we saw was a slight increase in general kind of arrears rates on housing and credit card debts and then a bit of a slide. So what we're likely to see in the next six to 12 months is a repeat of that.

REBECCA HYAM: Since the GFC, there’s been a strong trend among households to repay loans, spend less on discretionary items and save more money.

Australians are now saving slightly more than 10 per cent of their income, which is the highest level since the 1980s.

But professor of Economics at the Charles Darwin University, Bill Mitchell, says this new-found fiscal responsibility is just evidence of the excessive debt Australians built up prior to the GFC, coming home to roost.

BILL MITCHELL: One of the things that's keeping the household sector from spending more and pushing economic growth through consumption is because households went on a credit binge before the crisis and they are now trying to reduce their debt levels.

REBECCA HYAM: One of the stand-out developments in the last few years is that households have either maintained or increased the amount they're paying off their mortgage.

MICHAEL WORKMAN: People are not changing their repayment amounts, even though interest rates have fallen, so they generally tend to get ahead of their repayment schedules. So therefore it makes it a little bit easier for them in a sense to kind of cope with the period possibly of unemployment and also having housing debt.

And that also makes the kind of lenders a little bit more relaxed about some of the issues around loss of income.

He's also warning of a credit frenzy if rates remain too low for too long.

BILL MITCHELL: We've got an over-reliance on monetary policy; we somehow think that small basis points cut in interest rates will have dramatic effects on people's capacity to spend more. I think what we've got to see is that the sensitivity to the economy to interest rates is relatively low. We certainly don't want households to be going on another borrowing binge now, given the state of household debt.

REBECCA HYAM: But anyone with a home loan will be hoping the Reserve Bank does cut interest rates on Tuesday week.